A Rare Peek Into How Wachtell Bills for Deal Work

A Wachtell, Lipton, Rosen & Katz client letter obtained by The American Lawyer.Credit

Updated, 12:42 p.m. | For most law firms, work on mergers and acquisitions is paid by the usual model of billable hours. And then there is Wachtell, Lipton, Rosen & Katz.

Thanks to a client letter obtained by The American Lawyer, the wider world now knows how Wachtell — regarded as one of the premier legal deal shops around — makes its money, at least when it comes to M.&A.

The document in question is a 2012 letter from Wachtell to the general counsel of CVR Energy, an oil refiner that had hired the law firm to (ultimately unsuccessfully) defend it against the billionaire activist investor Carl C. Icahn. In the letter, Wachtell partner Benjamin Roth outlines the unusual billing structure for mergers work: a $200,000 fee paid up front, followed by an estimated percentage of a resulting transaction. That typically ranges from at least 1 percent for any matter under $250 million to 0.1 percent or less for deals over $25 billion. (The firm may also seek reimbursement of expenses.)

Such a structure can pay out handsomely. For example, the firm advised Allergan in its $66 billion sale to the fellow drug maker Actavis. At 0.1 percent, the Wachtell team led by Daniel Neff and David Katz would have brought in $66 million in fees for that assignment. And then consider that last year alone, the firm advised on three transactions worth more than $25 billion.

As explained in a copy of the firm’s billing policy attached to the document:

Matters undertaken by the firm are at all times afforded the direct personal attention of partners having expertise and sophistication with respect to the issues, and staffing is designed to provide the highest quality representation.

In order to operate in this manner we must base our fees not on time, but on the intensity of the firm’s efforts, the responsibility assumed, the complexity of the matter and the result achieved. Overall, we seek to obtain outstanding results for our clients for a fee that our clients will feel fairly values our services.

If a client wants to know what the breakdown of that work involved, as is the case at virtually every other law firm, tough luck. Wachtell “does not furnish long-form descriptions of services or details as to particular lawyers and hours.”

Perhaps that structure helps explain why Wachtell’s numbers are the envy of its industry. According to The American Lawyer’s most recent annual rankings, the firm tops its competitors in the closely watched measure of profits per partner, which came in at nearly $4.8 million in 2013.

How can Wachtell pull off this unusual payment structure? It’s in large part because the firm is so highly regarded. It ranked seventh in Thomson Reuters‘ list of top legal deal advisers for 2014, with 104 transactions worth $366 billion. (That’s down from being ranked third in 2013.)

And Wachtell has topped Vault’s ranking of the most prestigious law firms in the United States since at least 2007, consistently outpacing the significantly older white-shoe Cravath, Swaine & Moore.

But as The American Lawyer notes, CVR — now owned by Mr. Icahn — has sued its former legal adviser, seeking to reclaim the $6 million it paid.